Using the August 2018 Equity Mutual Fund Performance Screener published yesterday, we find out how large-cap and value-oriented mutual funds have fared against the Nifty 100 Equal Weight Index. This index has equal exposure to the top 100 stocks by free-float market capitalization. Sundaram and Principal AMC have index funds based on this. So like the Nifty Next 50 (another hard to beat index- see link below), it is practically possible to track this index (although both the funds have low AUM).

Nifty 100 Equal Weight Index vs large cap and value-oriented funds

A total of 45 large-cap funds (including Sensex and Nifty Index funds) and 13 value-oriented funds were compared with N100EW. Only direct plans were considered and 1,2,3,4,5 year durations were used. With the exception of Quantum Long Term Equity (QLTE), all other funds only allow a comparison of 150 5-year periods.

Out of the 1755 5Y periods studies for QLTE, the fund has outperformed N100EW an impressive 1490 times (85%) This 85% we refer to as outperformance consistency. Out of the remaining 56 funds, only the following 22 have an outperformance consistency of greater than 75%.

Aditya Birla Sun Life Focused Equity Fund – Growth – Direct Plan

Aditya Birla Sun Life Frontline Equity Fund – Growth – Direct Plan

Axis Focused 25 Fund – Direct Plan – Growth Option

ICICI Prudential Nifty Next 50 Index Fund – Direct Plan – Growth

IDBI Nifty Junior Index Fund Growth Direct

Invesco India Largecap Fund – Direct Plan – Growth

Reliance Large Cap Fund – Direct Plan Growth Plan – Growth Option

SBI BLUE CHIP FUND-DIRECT PLAN -GROWTH

JM Core 11 Fund (Direct) – Growth Option

HDFC Capital Builder Value Fund -Direct Plan – Growth Option

Templeton India Value Fund – Direct – Growth

Aditya Birla Sun Life Pure Value Fund – Growth – Direct Plan

ICICI Prudential Value Discovery Fund – Direct Plan – Growth

IDFC Sterling Value Fund-Direct Plan-Growth

Invesco India Contra Fund – Direct Plan – Growth

L&T India Value Fund-Direct Plan-Growth

Reliance Value Fund – Direct Plan Growth Plan

Tata Equity P/E Fund -Direct Plan Growth

ICICI Prudential Bluechip Fund – Direct Plan – Growth

BNP Paribas LARGE CAP Fund – Direct Plan – Growth Option

Quantum Long Term Equity Value Fund – Direct Plan Growth Option

Kotak India EQ Contra Fund – Growth – Direct

Out of the above 22 funds, 18 also have good downside protection (>75%). That is, typically those 18 funds fall lower than the index. The remaining 35 funds have a (return) outperformance consistency wrt N100EW as listed below. About 15 are Nifty and Sensex Index funds.

Excluding the index funds, only half the active funds have consistently outperformed 75% or better. So as regards the titular question, even now it seems to be a struggle for large caps to outperform the N100EW. Could well become harder in future. From June, large-cap funds can only invest 80% of their assets in the top 100 stocks. So the N100EW is a suitable index for comparison. In the past, many large caps had anywhere between 15-30% of midcaps at any given time. Even after the SEBI recategorization, it should be possible for large-cap funds to beat Sensex or Nifty (as they are market cap weighted). The challenge would be N100EW.

These six funds have got 25% more return than N100EW over the 5Y periods considered almost always!!

Invesco India Contra Fund – Direct Plan – Growth

Tata Equity P/E Fund -Direct Plan Growth

IDFC Sterling Value Fund-Direct Plan-Growth

L&T India Value Fund-Direct Plan-Growth

Aditya Birla Sun Life Pure Value Fund – Growth – Direct Plan

ICICI Prudential Value Discovery Fund – Direct Plan – Growth

It is striking that all of them are value-oriented!

Over 3-years, 600 data points were available. However, only 15 out of 57 funds consistently beat N100EW >= 75%.

Now, these 19 funds have less than 60% outperformance consistency over 1,2,3,4,5 years!!

Indiabulls Bluechip

Axis Bluechip Fund – Direct Plan – Growth

Kotak Bluechip Fund – Growth – Direct

HDFC Top 100 Fund -Direct Plan – Growth Option

Essel Large Cap Equity Fund-Direct Plan-Growth Option

SBI CONTRA – DIRECT PLAN – GROWTH

L&T India Large Cap Fund – Direct Plan – Growth

Tata Large Cap Fund -Direct Plan Growth

Edelweiss Large Cap Fund – Direct Plan-Growth option

UTI – Master Share-Growth Option – Direct

Canara Robeco Bluechip Equity Fund – Direct Plan – Growth

Franklin India Bluechip Fund- Direct – Growth

HSBC Large Cap Equity Fund – Growth Direct

JM Large Cap Fund (Direct) – Growth Option

IDFC Large Cap Fund-Direct Plan-Growth

LIC MF Large Cap Fund-Direct Plan-Growth

UTI Value Opportunities Fund- Direct Plan – Growth Option

DSP BlackRock Top 100 Equity Fund – Direct Plan – Growth

Taurus Largecap Equity

So what should we do?

There was a time ICICI Nifty Next 50 had a low AUM. But over the last year, it has increased significantly. I expect the same to happen to Sundaram and Principal N100EW index funds. At that point, those who have the confidence to manage risk on their own can consider a shift from large-cap funds. For now, let us watch from the sidelines.

As strategic indices become more popular, mutual fund houses can no longer claim outperformance over market cap weighted indices. I had always maintained that when the facts change I will change my stance too. I think there is more than enough evidence that we are on an extended inflexion point where index investing seems to make sense for those who can manage risk. I had already lamented that we do not have a midcap index fund (anymore!)

Yes, there are about 50% of active funds that can outperform a strategic index (return-wise). However, since we cannot know which those funds are beforehand, indexing is the simplest solution. However, lack of popular options and lack of liquidity in ETFs are still obstacles. As mentioned in this post: Here is how you can select ETFs by checking how easy it is to buy/sell them, we cannot rush progress. As our equity market grows in popularity, index investing will become a viable option We just need to sit it out.

If you cannot stomach paying fees to active large-cap funds, then switch to equity-oriented balanced funds: Using Balanced Mutual Funds As The Core Equity Portfolio Holding At least there, the fee has better justification (more on this later). Note that both N100EW index funds have only about 19-20 Cr in AUM each. Unless this improves fast, the AMC will simply shut down the fund or merger it with another. So don’t get too excited with the “I told you so about indexing” mode. Still, early days and still not hard to beat market cap weighted large cap indices. It is not enough if facts change. Practical alternatives must also become popular enough.

Do share if you found this useful

Do check out these related articles:

About the AuthorM. Pattabiraman(PhD) is the author and owner of freefincal.com. He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Follow @freefincal “Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis.
He conducts free money management sessions for corporates and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)

Want to conduct a sales-free "basics of money management" session in your office?

I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Content Policy

Freefincal has original unbiased, conflict-of-interest-free, topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content. We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policyOur website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books

You Can Be Rich Too with Goal-Based Investing

My first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.